Endeavour’s first quarter sales result revealed the strength of its off-premise liquor retail network, but was diminished by the lockdown impacts on the hotel portfolio. As NSW and Victoria re-open, the underlying health of the whole business looks encouraging and sales trends will improve.
While 40% of EDV’s hotels nationally were closed during the period, customers partially offset that by purchasing more product for home consumption. While retail sales were basically flat at $2,658 million compared to the same COVID-affected period last year, on a 2-year comparison, sales were up 21.4%.
Online sales have continued to grow quickly reaching $305 million in 1Q22, an increase of 34.4% over last year. Online penetration of total sales is now at 11.5% with a portion of this growth attributable to more home consumption in the absence of hotel patronage. The online shift is also reflected in the rapidly rising numbers of My Dan’s loyalty members now at 5.9 million.
The lockdowns in NSW and Victoria may have ended, but some restrictions, such as social distancing and vaccination requirements, remain in place that will further crimp sales in the current quarter.
Amidst a furious pace of pub acquisitions nationally, EDV made two of its own adding the Terrey Hills Tavern in Sydney and The Manly Hotel in Queensland to its portfolio of 336 hotels and 5 managed clubs. Prices being paid for hotels are very high.
Management noted the emerging problem of global supply chain constraints that are limiting access to some products, particularly imported drinks. There is also an industry shortage of staff that is creating difficulties when re-opening hotels.
Investment view
The artificial boost to off-premise liquor retail sales has seen this segment increase sales by 30% over two years. Sales trends should slow gradually over the next two years for EDV retail as these transitory factors dissipate. The opposite may be true for hotels as business steadily returns to some form of normality, helped along by the festive season, summer weather and a surge of people eager to socialise again.
But we are cautious on the earnings outlook for EDV. In retail, online sales are margin dilutive and in hotels, gaming earnings are facing some regulatory hurdles in Victoria in FY23f.
In our view, consensus forecasts for FY22-23f are slightly too high and need to account for the sales trends discussed above for each part of the business.
We continue to view the non-disclosure of EDV’s gaming revenue and earnings as an investment risk given its likely materiality to hotel earnings. There are also regulatory risks associated with this aspect of the business that could have a meaningful impact if changes occur.
Conditions have improved for EDV but we think market expectations are too high. We have retained our Hold recommendation on this basis.
